April 15, 2015
Prepared at the Federal Reserve Bank of Cleveland based on information collected on or before April 3, 2015. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicate that the economy continued to expand across most regions from mid-February through the end of March. Activity in the Richmond, Chicago, Minneapolis, Dallas, and San Francisco Districts grew at a moderate pace, while New York, Philadelphia, and St. Louis cited modest growth. Boston reported that business activity continues to expand, while Cleveland cited a slight pace of growth. Atlanta and Kansas City described economic conditions as steady.
Demand for manufactured products was mixed during the current reporting period. Weakening activity was attributed in part to the strong dollar, falling oil prices, and the harsh winter weather. Business service firms saw rising activity, especially for high-tech services, and they expect positive near-term growth. Cargo diversions resulting from labor disputes on the West Coast boosted activity at several East Coast ports. A majority of Districts reported higher retail sales, and they cited consumer savings from lower energy prices as helping boost transactions. Auto sales rose in most Districts. Tourism and business travel is rebounding from the harsh winter, with contacts expecting growth for the remainder of the year in corporate and leisure travel. Residential real estate activity was steady to improving across most Districts, although there was some slowing in housing starts due to abnormal seasonal patterns owing to the harsh weather. Multifamily construction remains strong. Activity in nonresidential real estate was stable or improved slightly across many Districts. Agricultural conditions worsened slightly. Factors contributing to these conditions varied by District, but included wet fields, persistent drought, and a harsh winter. Investment in oil and gas drilling declined, while mining activity was mixed. Banking conditions were largely stable, with some improvement seen in loan demand.
Labor markets remained stable or continued to improve modestly. Layoffs related to the decline in oil and gas prices were reported in multiple Districts. Difficulty finding skilled workers was frequently reported. Districts noted modest upward pressure on wages and overall prices.
Manufacturing
Demand for manufactured products was mixed during the current reporting period. Boston, Philadelphia, Atlanta, Chicago, Dallas, and San Francisco reported an increase on net, while some weakening was observed in New York, Richmond, St. Louis, and Kansas City. Gains in activity among aerospace firms were reported in the Cleveland, Chicago, and San Francisco Districts. Philadelphia, St. Louis, and Kansas City noted weakening in the primary and fabricated metal products industry, while their counterparts in Dallas reported growth. A slowing in the chemicals industry was observed in St. Louis and Kansas City, while chemical producers in Dallas cited lower prices and margins, and lower exports, which they attributed to the strong dollar. Weakness in the steel industry was seen in Cleveland, Chicago, and San Francisco. The auto industry remained a source of strength in Cleveland and Chicago. Contacts in Boston, Philadelphia, Richmond, and Dallas believe harsh winter weather had a dampening effect on activity. Boston, Cleveland, Chicago, and Dallas attributed some weakening in demand to a strong dollar, which increased the risk to international sales. One firm in Boston noted that the changing value of the dollar increases incentives to minimize inventories. Falling oil prices had a negative impact on new orders to energy supplier companies in Cleveland, Chicago, Kansas City, Dallas, and San Francisco. Some firms in Cleveland and Philadelphia noted heightened uncertainty due to anticipated weak demand from customers serving the energy sector. However, an oilfield machinery manufacturer in Dallas expects that the energy industry will begin showing signs of improvement in the second quarter. Capital spending plans were little changed in Boston and Cleveland, but they declined in Philadelphia and Kansas City. Richmond and Atlanta reported a slight increase in inventories, whereas Boston reported no significant changes. The overall outlook by contacts in Boston, Philadelphia, and Dallas is positive. However, in Cleveland and Atlanta, optimism regarding the outlook has waned slightly during the last six weeks. In Kansas City, producers' expectations for future activity moderated somewhat but remain slightly positive.
Nonfinancial Services
Nonfinancial services firms saw rising activity across all reporting Districts. A pickup in demand for high-tech services such as cyber security and web development was reported by contacts in Richmond, Minneapolis, Kansas City, Dallas, and San Francisco. Healthcare-related services are experiencing accelerating growth in Boston and Richmond. Dallas law firms noted more work in mergers and acquisitions, bankruptcies, and litigation. Sales were strong for accounting services in Richmond and Dallas. A rise in demand for architectural services was seen in Minneapolis and San Francisco. In Boston, government agencies started awarding more contracts to private-sector consulting firms, albeit with less assured funding. Service providers in Boston, Philadelphia, Kansas City, and Dallas have an optimistic outlook and expect positive near-term growth trends for their firms.
Demand for transportation and freight services was mixed. Freight haulers in Cleveland reported that volume has declined from the high levels seen late last year. They attributed it to harsh winter weather and fallout from the labor dispute at California ports, which lessened shipments to the District. District port officials in Richmond noted stronger volumes over the reporting period. Diversions from the West Coast added to the volume. Coal exports continued to decline, while auto exports and imports remained strong. Reports on transportation activity in Atlanta were mixed. Contacts at East Coast ports cited significant upticks in cargo volumes as shipments were redirected from the West Coast due to labor disputes. Railroad cargo traffic, however, was described as flat to only slightly up compared with year-ago levels. The majority of Atlanta's logistic contacts anticipate higher growth for the year. In Dallas, sea, air, and courier cargo volumes were up over the reporting period, while rail cargo volumes were down. Air cargo contacts noted that volume growth in the international market outpaced that in the domestic market.
Consumer Spending and Tourism
The Boston, Philadelphia, St. Louis, Minneapolis, and San Francisco Districts reported higher retail sales. New York, Richmond, Atlanta, Chicago, Kansas City, and Dallas reported that retail sales were mixed to slightly down, with colder-than-normal temperatures being mentioned as one possible cause. Cleveland noted that retail sales were flat year-over-year. Among retailers, the outlook was generally optimistic in Boston, Philadelphia, Atlanta, St Louis, Kanas City, and Dallas. Many Districts noted that savings from lower energy prices are helping to drive retail sales this cycle, as is the improving weather situation. Dallas retailers expressed some caution about the strength of the U.S. dollar, while New York noted that some retailers saw a falloff in Canadian shoppers due to the strong dollar. It was reported that consumer confidence in the New York District, albeit slightly lower, remains near its multi-year high, set in January.
Auto sales rose in most Districts during the cycle period. Reports from Cleveland, Atlanta, and Chicago indicated that lower gasoline prices were causing consumers to shift from cars to light trucks or SUVs. New York and Philadelphia reported that sales had bounced back in March from the harsh winter weather in February. However, in Kanas City, auto sales slowed in March and were flat compared to last year. Dallas continues to see auto sales increase, but may see slowing demand growth later in the year, depending on the effect of the energy-industry slowdown and interest rate movements.
Tourism and travel started to rebound from the harsh weather seen in the winter months. Boston and New York reported tourism below levels seen a year ago. Boston noted that there are still ripple effects through many industries that are related to the bad weather this past winter, while Atlanta, St. Louis, and Kansas City reported positive and growing activity in their Districts. A few Districts noted that business travel and convention-center bookings are up. Atlanta mentioned that lower gasoline prices are a contributing factor to the rise in visitors driving to destinations. Minneapolis reported tourism activity as flat for the cycle; warm weather and the lack of snow brought an early end to winter tourism for several areas in this District. But summer bookings for hotels are up compared to last year. New York tourism activity has slowed somewhat in recent weeks. Theaters are experiencing weaker revenues, and occupancy rates and room rates in New York City are down from a year ago. All reporting Districts noted that corporate and leisure travel are expected to be up in 2015.
Real Estate and Construction
Residential real estate activity improved in the Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts, while remaining steady in all others, except New York, which reported softening conditions. Philadelphia, Cleveland, Atlanta, and Dallas reported a slowdown in construction activity due in part to harsh weather conditions. Low-to-declining levels of inventory were cited by contacts in Boston, Philadelphia, Cleveland, Atlanta, Chicago, and San Francisco. The Chicago District reported that inventories were near historic lows, particularly for lower-priced homes. Most Districts reported a tight supply of residential real estate in most price points of the market. The Philadelphia and Cleveland Districts reported that mid- to high-priced homes were selling better, while Chicago, Kansas City, and Dallas reported that low- to mid-ranged homes were outpacing other categories in sales. Cleveland and Philadelphia reported an absence of first-time homebuyers. Contacts across the system uniformly reported that they were optimistic and many expect a greater than normal upswing in home sales with the coming of spring. The multifamily sector remains strong, with flat to declining vacancy rates reported in multiple Districts. Boston, Cleveland, and San Francisco reported a continued shortage of skilled labor, which was cited as a factor driving up wages.
Commercial real estate activity remained stable to expanding across many Districts. Boston, New York, Philadelphia, Chicago, Minneapolis, Dallas, and San Francisco all saw strong gains in industrial and office building construction. Demand for commercial properties in the city of Boston continues to be fuelled by foreign institutional investors, many of which are increasing their allocations to real estate. Contacts in Boston, Richmond, Atlanta, Minneapolis, and Dallas noted stable to strong multifamily construction. Chicago reported that leasing of industrial buildings, office and retail space all increased. Cleveland mentioned that successful developers have easier access to credit compared to prior years, and Boston reported a slight uptick in speculative activity for commercial construction.
Banking and Finance
Banking conditions remain positive across reporting Districts. On balance, demand for credit increased at a slight to moderate rate in Philadelphia, Cleveland, Richmond, St. Louis, Kansas City, Dallas, and San Francisco. Commercial real estate loan demand was strong in Atlanta and Dallas, while contacts in Philadelphia and Kansas City described CRE lending as stable. Demand for commercial and industrial loans grew slightly in St. Louis and Kansas City, while exhibiting stronger growth in New York, Philadelphia, Cleveland, and Chicago. Bankers in Atlanta reported that C&I lending in areas linked to the energy industry slowed as a result of oil-price declines. In San Francisco, some banks are building a sizeable pipeline of pending loans and have increased interest rates a bit in order to bring demand more in line with supply. Consumer lending grew in New York, Atlanta, and Chicago but was soft in Cleveland and San Francisco. Auto lending remained strong in Atlanta, Chicago, and San Francisco. One contact in Cleveland attributed weakened bank-financed auto lending to captive-finance operations that are becoming very aggressive. Residential mortgage demand--particularly for refinancings--grew in Richmond, Chicago and Dallas and was steady in New York. Home equity line volumes fell in Philadelphia and Cleveland. Bankers in the Philadelphia and Kansas City Districts expressed confidence in the quality of their loan portfolios, while New York and Cleveland noted that delinquencies were down or remained at low levels. Richmond reported that there was some loosening of credit standards, with one lender expressing concern that credit quality was declining as a result.
Agriculture and Natural Resources
Agricultural conditions worsened slightly across reporting Districts since the previous cycle due to a variety of conditions including wet fields, persistent drought, and a cold winter. Prices for corn and soybeans fell over the reporting period in the Atlanta, Chicago, Minneapolis, and Kansas City Districts. Chicago and St. Louis reported that less corn will be planted this year, being replaced by soybeans. Contacts in the Kansas City District noted that feeder cattle prices have improved. Contacts in Minneapolis reported turkey producers were concerned about an outbreak of an extremely virulent strain of flu that has killed thousands of birds. Input prices for the upcoming spring planting season were reported as increasing in Chicago. Drought conditions improved but still persisted in some areas of the Atlanta, Dallas, and San Francisco Districts, while wet field conditions slowed planting in parts of Richmond, Chicago, St. Louis, and Dallas. Falling pork prices were attributed to declining export demand, resulting in higher domestic supplies. Contacts in Chicago noted that beef prices remain elevated, but off their highs, due to cattle herds being rebuilt.
Reports indicated that energy market conditions declined in the Atlanta, St. Louis, Kansas City, and Dallas Districts. The number of active drilling rigs fell in Cleveland, Minneapolis, Kansas City, and Dallas. Active drilling rigs in North Dakota and Montana reached their lowest levels in five years. However, despite the decline in permits and new investment, overall production in the oil and gas sector remains strong to increasing. Oil and gas producers in the Cleveland, Atlanta, and Dallas Districts anticipate cuts in 2015 capital expenditures. Layoffs were reported in the Cleveland, Atlanta, and Kansas City Districts. Coal production declined year-over-year in the Richmond and St. Louis Districts but was mostly unchanged in Cleveland. Coal prices were reported as unchanged in the Richmond District, but declined in Cleveland. While producers are optimistic about continued production growth in oil and gas, layoffs are occurring in the industry as well as in coal.
Employment, Wages, and Prices
In most Districts, labor market conditions remained stable or continued to show modest improvement. Increases in hiring or employment levels were reported in the New York, Richmond, Atlanta, Chicago, St. Louis, and Dallas Districts. In Boston, only stronger-performing firms have made significant increases to employment levels, while payrolls in Cleveland remained generally stable. Several layoffs were announced by contacts in Minneapolis, and so changes to labor markets were described as mixed. Layoffs in the manufacturing and energy sectors were reported in multiple Districts including Cleveland, Atlanta, Minneapolis, Kansas City, and Dallas. These reductions were primarily related to the decline in gas and oil prices and the resultant decline in upstream demand such as iron ore mining and steel manufacturing. In Chicago, skilled workers continue to be in high demand. Firms in many Districts, including Richmond, Atlanta, St. Louis, Kansas City, and Dallas, reported having difficulty finding skilled workers, especially in professional and business services and the IT sectors. The Richmond, Atlanta, and St. Louis Districts specifically noted an increasing incidence of voluntary turnover of employees.
Modest or moderate wage pressures were reported in several Districts including New York, Richmond, St. Louis, Kansas City, and San Francisco. Wage pressures in Atlanta were muted. Wage pressures in Cleveland and Chicago were more pronounced for skilled workers. However, Chicago noted that there were more reports of wage increases for unskilled workers than in the previous reporting period. Contacts in San Francisco noted some seepage of wage pressures that had been limited to higher-end jobs in urban areas into middle-tier jobs and smaller towns. In the Minneapolis District, the strong wage increases observed in the energy-producing region over the past few years have slowed, and in some cases, declined. Retail sector wages in Kansas City experienced a mild decline but are expected to grow in the coming months.
Districts generally reported stable or modestly increasing overall price levels. Prices remained generally steady in the New York, Cleveland, Minneapolis, and Dallas Districts; while prices in Philadelphia, Richmond, Kansas City, and San Francisco increased slightly. In the Chicago District, input-price declines have been putting downward pressure on manufacturing prices, while retail prices have remained mostly unchanged. Aside from on-going energy-price increases associated with limited natural gas capacity in the region and the effects of the strong dollar, non-labor costs and prices in Boston remain steady. Retailers in Dallas noted increased transportation costs due to the West Coast port strike, while firms in several Districts mentioned lower transportation costs due to lower energy prices.